IAS 1 para 97, disclosure of settlement with UK SFO and other authorities

Rolls-Royce Holdings plc – Annual report – 31 December 2016

Industry: manufacturing

Chairman’s statement (extract)

Corporate governance

The recent settlements, with the UK Serious Fraud Office and other authorities, are a salient reminder of how critical it is to ‘win right’. As a result of past, unacceptable conduct we have agreed to pay financial penalties and costs of around ￡671m. These dishonest acts, some as recent as 2013, are a major blemish on the reputation of the business and we have apologised unreservedly.

Importantly, the Board has taken extensive action to strengthen ethics and compliance procedures across the Group over recent years, so that high standards of conduct are embedded as an essential part of the way we do business. We share a determination to see that Rolls-Royce comes out of this episode as a more trusted, resilient and better managed business that wins right every time. Every employee, from the bottom to the top of the Group, is fully aware of the importance of doing the right thing.

As described in the Nominations & Governance Committee report (see page 70) our governance framework was rolled out in the summer and provides clarity and accountability, providing additional integrity to our business.

Chief Executive’s review (extract page 8)

Agreement reached with various investigating authorities

In mid-January 2017, we announced that we had entered into Deferred Prosecution Agreements (DPAs) with the UK’s Serious Fraud Office (SFO) and the US Department of Justice (DoJ) and completed a Leniency Agreement with Brazil’s Ministerio Publico Federal (MPF). These agreements relate to bribery and corruption involving intermediaries in a number of overseas markets, concerns about which we passed to the SFO from 2012 onwards following a request from the SFO.

The agreements are voluntary and result in the suspension of prosecution provided that the Company fulfils certain requirements, including the payment of financial penalties.

The agreements will result in the total payment of around £671m. This is recognised within our 2016 accounts.

Under the terms of the DPA with the SFO, we agreed to pay £497m plus interest under a schedule lasting up to five years, plus a £13m payment in respect of the SFO’s costs. We also agreed to make payments to the DoJ totalling around US$170m and to the MPF totalling around US$26m. As a result, the total payment in 2017 is expected to be £293m (at prevailing exchange rates) with some elements having already been paid.

It is our intention that these financial penalties will be paid from existing facilities and an improved underlying cash flow performance in the longer term.

Consolidated income statement (extract)

For the year ended 31 December 2016

1 2015 figures have been restated as a result of ￡11m of Power Systems costs previously reported in ‘cost of sales’, being reclassified as ‘commercial and administrative costs’ to ensure consistent treatment with 2016. The applicable notes have also been restated.

2 In 2016, ‘commercial and administrative costs’ include £671m for financial penalties from agreements with investigating bodies (see note 23) and £306m for the restructuring of the UK pension schemes (see note 19).

23 Contingent liabilities (extract)

On 6 December 2012, the Company announced that it had passed information to the Serious Fraud Office (SFO), following a request from the SFO for information about allegations of malpractice in overseas markets. On 23 December 2013, the Company announced that it had been informed by the SFO that it had commenced a formal investigation. Since the initial announcement, the Company continued its investigations and engaged with the SFO and other authorities in the UK, the US and elsewhere in relation to the matters of concern.

In January 2017, after full cooperation, the Company concluded deferred prosecution agreements with the SFO and the US Department of Justice and a leniency agreement with the MPF, the Brazilian federal prosecutors which are described on page 8. Prosecutions of individuals may follow and investigations may be commenced in other jurisdictions. In addition, we could still be affected by actions from customers and customers’ financiers. The Directors are not currently aware of any matters that are likely to lead to a financial loss, but cannot anticipate all the possible actions that may be taken or their potential consequences.